Because Mainstream Personal Finance Advice Is Not What It Should Be

Our house had an alarm when we moved into it 11 years ago. It was not particularly useful. With children too young for school, there was somebody in the house almost 24/7 so the alarm almost never got turned on. After a while it broke, I never bothered to get it fixed, and eventually I just cancelled the contract. All that is left now are some unobtrusive but ugly motion detectors in the corners of some rooms.

Home alarms are more about psychology than economics. That much is clear from the overwrought TV commercials the alarm companies run. They do not mention the discount you will get on your insurance or the average reduction in property loss. Instead we get unlikely dramas with burglars in ski masks and foiled home invasions.

But, just for fun, let us pick up the theme of the Times piece: are home security systems worth the money in strictly economic terms? Do you pay out more dollars or fewer dollars for the alarm than the system will save you?

On the cost side, there is the installation cost of the system itself as well as the ongoing cost of monitoring by the alarm company. Best I can remember, I think we paid $400 a year for monitoring. After poking around on the web for a bit I think this is broadly typical.

Of course, I have no idea what the initial installation cost was. Alarm systems are priced like cell phones, heavily subsidized when attached to multi-year contracts. And like cell phones, the most basic systems approach free-with-contract, while the more elaborate ones can carry a noticeable upfront cost. The one here had bells and whistles, so I am going to assume it set the previous owner back a few thousand dollars.

On the benefit side, there is the discount you get on your homeowners insurance and the expected reduction in loss from burglary. The author of the Times article says he saved $222 a year on his insurance, and that sounds like the right ballpark for what we were saving. I remember the annual fee being about $150 higher than the insurance savings.

What you will save, on average, from losses due to getting your stuff stolen is a much more slippery number. The Times cites a statistic that the average loss for a home with a security system is $2077 lower than for homes without a system. I am not entirely comfortable with that calculation. For one thing, it is possible that alarms are more common in rougher neighborhoods where the residents have less valuable things to steal. Or perhaps the opposite is true, that richer folks with more stuff to take are more likely to have an alarm.

In either case, the loss-per-incident figure is not quite what I want to know anyway. I thought a major benefit from an alarm was supposed to be deterring break-ins altogether. What I really want is the average loss per year due to burglary for alarmed and unalarmed houses.

It took me a moment to realize it, but I already have that number. It is the discount on the homeowner’s insurance. Insurance companies are pretty good at this sort of thing. It is possible that the reduction in average annual losses due to an alarm, i.e. the reduction in the amount the insurance company will have to pay out, is somewhat greater than the insurance premium discount, but it is unlikely to be much greater, and it is certainly not any lower.

Moreover, this observation quickly leads to the epiphany that the reduction in expected loss is not something you need to know after all. Including it in the calculation would be double counting. The insurance company will pay for your loss, alarm or not. If you do have an alarm you, essentially, need less insurance and so you will save some money.

If the money you save on insurance is more than the alarm costs, then the alarm is a good investment. I gather this is a relatively unlikely event. And the reason for that is not too subtle. As the Times article describes, home alarms just do not work all that well. 80% of alarms from these systems are false, and the police respond to such calls with all the urgency that you would expect from that statistic.

Which leaves us with the non-economic “peace of mind” reasons for buying an alarm. I am ambivalent about this as a justification. On the one hand, if it really makes a person happy to spend money in this way then who am I to object? There are few such opportunities in life. On the other, I don’t think it should make anybody happy.

[This last paragraph had to be corrected, because I cannot read a table of numbers. Gotta stop drinking and blogging.]

In 2007 there were 2,179,000 burglaries in the US, of which 68% were at residences. There were 128 million housing units in the US in 2007. So on average, the chances of a US home being burgled in a year is something like 1 in 86. And an alarm will not eliminate the chance of burglary. It will only, we presume, somewhat reduce that already small chance and, apparently, reduce the size of the loss. Does paying a hundred plus dollars a year for this really make you happier?

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Good article. On a final note, any benefits in reducing your chance of being burgled in the first place can be simulated through the purchase of a sign implying that you have a security system. I’m sure you can find one on ebay.

For a deterrent the burglar simply has to think that there is an alarm in the house. I know lots of people leave the “This house is protected by …” on the lawn after cancelling the contract. Maybe that is all you need. Get a hold of the sign and stick it in the lawn??

That 1 in 200 chance seems awful high to me, but I guess you’d have to look at your local crime rate and neighborhood etc.

My condo unit has an alarm system in it, never turned on. For a robbery to occur, someone would have to get past the security in my building entrance, figure a way to rig the elevator to open on my floor without the fob key, target my unit of all the units on the 41st floor of my 45 story building, break down a door/pick the lock; and even then he’d only be able to get away with likely one elevator load of stuff as I’m sure the police would already be there once he overpowered the security guards.

And frankly, if they are willing to do all the other things, an alarm bell going off is not going to stop them. Nor would my being home, likely. So it’d be waste for me unless my content insurance would be less than the alarm contract, which I should think is impossible since its only $120/year.

I believe your conclusions are totally right. The insurance companies know better than anyone the financial costs and savings of burglar alarms. Alarms are mostly about emotional security not financial savings. Best deal I’ve seen is alarms that don’t have reoccurring monthly monitoring fees.

I concur 100% about the emotional nature of buying an alarm. My wife wanted one after her friend’s car got burgalrized in our driveway (locking the barn after the horse ran away syndrome). However, there is one important function (our alarm anyway) that is nice to have and that is the risk of fire. Fire monitoring is a good peace of mind, especially since we own a dog. I’m never worried about the crap being stolen, that’s the purpose of insurance. What I was interested in was the loud noise waking me up so that I can retrieve the “real” home protection and the fire monitoring because of my dog. All in all, $150 a year doesn’t seem to bad for that level of comfort.

“That 1 in 200 chance seems awful high to me, but I guess you’d have to look at your local crime rate and neighborhood etc.”

I think that you have to keep in mind that the statistic likely includes all reported burglaries which includes such things as ex-spouses/boyfriends breaking in to get back something they think belongs to them, etc.

I have always thought alarms were a little over the top for most situations. I have to wonder, too – if a person is really keen on breaking in because you have priceless paintings in your house – wouldn’t they probably know how to defeat an alarm? I know that not every prowler is super thief, but if alarms can generate so many false positives, it seems reasonable to think they could be made to generate false negatives as well.

Frank, thank you very much for pointing out the the homeowners insurance discount is approximately the reduction in expected loss due to burglaries.

Shawn, I think the fire-proctection/warning value could be included in the insurance discount. (Presumably, your homeowners insurance covers fires.) However, you’re dog’s life is obviously not replaceable.

And, Shawn, thanks for pointing out that alarms can be used to alert you to a prowler/burglar when you are home. Keeping yourself and your family safe would also not be reflected in the insurance discount.

I am a strong advocate of home security sysstems. Our home has been broken into twice and the theives only got away with a few items for fear of the police arriving before they got away. We live in a seculed area and it wasn’t for police being notified the crooks could have easly cleaned out the house. Instead they only grabbed a TV and other small things each time. I bought my system for $400 and only pay about $10 a month to have it monitored. My savings on my homeowners has paid for the system and the monthly fee is well worth it. My system also has a smoke detector, so if we are away and a fire starts the FD will be on there way to quelch the fire. All in all, I say get one, but not with an ADT type company. Buy your system upfront and pay a small month fee.

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Usually it is caused by the sincerness displayed in the article I browsed.

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